Methods of depreciation Essay

After completing the spreadsheet for Fan Company A, I suggest that the company use units of output for their method of depreciation. The reason why I choose units-of-production, which is also known as activity method, is due to the fact that is incorporates the straight-line method while figuring in the life expectancy in terms of numbers/time of operation for the asset (WileyPlus). For example why depreciate a piece of equipment the same amount every year if in that year it has been barley used compared to a year when it has been in constant use. Depreciating using units-of -production can in my opinion more accurately determine the life and value of the item in question. The reason why I do not suggest using straight-line method is because it measures age and doesn’t consider the amount of usage.

I did read in the text of WileyPlus that most companies use the straight-line method because of its simplicity and is a constant dollar figure they can determine each year. Looking at double declining balance method it has the assets depreciating at an accelerated rate compared to the other methods. This method does not compute the deduction of salvage value in it. Even-though this method will have a greater result in depreciation expense each year the total depreciation over the lifespan of the asset will not be greater than the total depreciation.

Furthermore, another method of accelerated depreciation is sum-of-the-years’-digits. This method takes the asset’s expected life and adds together the digits for each year. So if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year. Even-though this method takes into consideration the life of the asset it is to accelerated and can depreciate faster than needed while causing the asset to appear invaluable when in all actuality it is in good operating/functioning order.